Ch 11Ex 115 Exercise 11-5 Paybeck period computation; even cash flows LO P1 Comp

Question

Ch 11Ex 115 Exercise 11-5 Paybeck period computation; even cash flows LO P1 Compute the payback period for each of these two separate investments 5 pores A new operating system for an existing machine s expected to cost $270000 and have a useful life of four years. The system ynelds an incremental after tax income of $77884 each year after deducting its straight-line depreciation. The predikted saivage value of the system is $10000 b. A machine coss $170000, has a $14,000 salvage value s expected to last eight years, and wn generate an atter ax income of $43.000 per year after straight line depreciation Choose hN s Payback period

Explanation / Answer

11-5 solution

A.

Annual depriciation=(270,000-10,000)/4

=$65,000

Annual net cash flow=annual after tax income+depriciation

=$77,884+65,000

=$142,884

Pay back period=cost of investment/annual net cash flow

=$270,000/142,884

=1.89 years

B.

Annual depriciation=(170,000-14000)/8

=$19,500

Annual net cash flow=annual after tax income+depriciation

=$43,000+19,500

=$62,500

Pay back period=cost of investment/annual net cash flow

=170,000/62,500

=2.72 years

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